ILS 2020: Bigger, converged, cheaper, more liquid, tradable & innovative

Executives from the insurance-linked securities (ILS), reinsurance and institutional investments space, all agreed that in 2020 the alternative capital market and ILS will be bigger, fully converged, cheaper, more liquid and tradable and more innovative than ever.

Speaking during an ILS focused panel discussion hosted by reinsurance firm Munich Re, the panel were asked to forecast where they saw the ILS market in 2020. All agreed that further growth was likely, with innovation and the need to tap the deepest source of capital available to protect people and economies from catastrophe risks a key driver.

Bermuda Stock Exchange President and Chief Executive Officer Greg Wojciechowski, said that he saw an opportunity for the ILS sector which requires innovation and a drive to enable the better protection of the world’s under-insured.

“The market from my perspective as an exchange operator, I clearly see this exposure gap as something that is very interesting. Everyone is fairly in agreement that providing cover for that exposure gap isn’t going to happen within the insurance and reinsurance industry, it’s going to come from the capital markets,” Wojciechowski explained.

He continued; “I think it’s a perfect opportunity that’s never been in existence before, for convergence to actually drive innovation as well as providing very important coverage to developing economies in a way that we’ve never seen before.

“The feel good factor is that we have an opportunity right now to do something very good, not only for our own companies but for the world.”

Wojciechowski went on to say that continued standardisation, improved structuring and product development would result in an “acceptance or mainstreaming of ILS vehicles.” He expects this to result in enhance liquidity and a greater ability to get the capital to regions of the world that really require it.

Andrew Ritchie, Partner Insurance Research at Autonomous Research LLP, said that in 2020 he expects the ILS market to be “bigger, converged and cheaper.”

“Our assumption would be that ILS will impact primary markets, primary property markets, aspects of casualty, there’ll be innovations on whole account type structures, Solvency II should give a lot of opportunity for alternative capital as well as traditional capital, so definitely bigger,” Ritchie explained.

“Secondly converged, as in it’ll be hard to draw a line between traditional and “new”, or alternative, capital. As in alternative capital providers launching permanent capital vehicles and reinsurers using alternative capital, so very converged,” he said.

Continuing; “The third thing is cheaper. What I mean by that is, I think one of the consequences of alternative capital should be that the traditional industry needs to look at its expense base harder. The reality is that alternative capital providers, even setting up permanent vehicles, are able to do it at lower cost and more efficiently.

“I think therefore one of the main consequences by 2020 is that the reinsurance industry needs to look at its cost base.”

Niklaus Hilti, Head of ILS at Credit Suisse, offered; “Personally I believe the market becomes very standardised in time, it will become a commodity, it will be listed and traded. My big belief is that by going that step now into the capital market and make it a tradable product where many investors can participate, it will bring down the cost and it will be much more efficient in the long run.”

Hilti said that it may take a very large loss in order to stimulate the demand and disruption to the market to push ILS to become an exchange traded market with significantly higher liquidity.

Thomas Blunck, member of the board at Munich Re, said that he expects to see continued development of ILS and that for insurance and reinsurance companies, ILS is becoming a “continuous corporate finance instrument that we will use more and more to lower our own risk capital charges and improve our price competitiveness.”

Blunck added that it is vital that ILS and the investors are sustainable, as Munich Re wants to offer this to its clients over many years. But he does believe that there is enough stability in investors such as pension funds.

Marco Sordoni, Head of Reinsurance at UnipolSai, a recent catastrophe bond sponsors, said that he expects a “smooth and building evolution” for ILS, but also noted that reinsurance can be more flexible. However he said that by 2020 he expects that UnipolSai will have sponsored its second cat bond and be using ILS capital more than it is today.

Todor Todorov, a senior investment consultant at Towers Watson, said; “Institutional investors are here to stay for a very long time, that’s not going to change.”

A lot more capital could enter the market, Todorov said, adding that he expects further growth.

“Definitely more transparency, this market is still somewhat new to our clients and a lot of the information out there is not as rich as other asset classes. More transparency would help and be welcome,” Todorov added.

He echoed Blunck’s comment that ILS become seen as corporate finance by many, adding that he expects investors will increasingly also see insurance and reinsurance companies as managers who can give them access to this risk premium and access to part of their portfolio.

“I think you’ll see a lot more of this and a lot more interesting partnerships,” Todorov finished.

A larger, more converged, cheaper, more liquid, more tradable and innovative ILS market is expected by these industry participants. That bodes well for those requiring risk transfer and risk capital and for the investors seeking to access the asset class.

Read all of our Monte Carlo Rendez-vous 2015 coverage here.